The Canada’s financial system, according to International Monetary Fund (IMF) and World Economic Forum, during recent financial crisis it has seemed to be more resistant compared to United States and Europe. Some experts assessed characteristics of Canada’s financial supervisory framework that may offer an approach that may be useful to consider for other countries. In fact, the system is framed by strong prudential regulation and supervision, a well-designed system of deposit insurance and arrangements for crisis management and resolution of failed banks, low risk tolerance and stringent capital requirements. The supervisory responsibility, in the Canadian financial system, is characterized by the federal government, the provincial governments and group of agencies within the federal government.

Financial System: a Canadian Model of Federal Regulation

During the global financial crisis Canada’s banks were well capitalized, well managed and well regulated, and they remain so to this day. No Canadian bank was in danger of failing or needed a government bailout. Thanks to limited exposure to the U.S. market and for a government management liability, which has facilitated access to credit for medium and long term, the Canadian economy has been able to reduce the damage of the recent financial crisis (the Canadian financial system had strengthened its management processes after the crises of the 80s and 90s, recapitalizing sectors related to the real economy, thanks to a strong system of inspections and supervision). In a recent assessment of Canada’s financial system, the IMF concluded that Canada’s system is highly mature, sophisticated, and well-managed.

There are many important participants, including Canadian policymakers and regulatory officials, involved in shaping and adapting these regulatory frames for Canada’s financial system. In fact, the system is characterized by strong prudential regulation and supervision and a well-designed system of deposit insurance and arrangements for crisis management and resolution of failed banks. Supervisory responsibility for the financial sector in Canada is divided among the federal government, among the provincial governments, and among a group of agencies within the federal government.

The federal government is responsible for supervising all banks, federally incorporated insurance companies, trust and loan companies, cooperative credit associations and federal pension plans. Provincial governments are responsible for supervising securities dealers, mutual fund and investment advisors, credit unions, and provincially incorporated trust, loan, and insurance companies. As a result, there are 13 provincial regulatory authorities, each administering securities laws and regulations. The Minister of Finance, however, oversees the incorporation of banks, permitting foreign bank branches, and reviews of large bank mergers. In particular, the minister has broad discretionary authority to disapprove mergers, which has effectively eliminated such transactions.

Furthermore, Canada’s model assigns the central bank (Bank of Canada – BOC) the main role of conducting monetary policy and maintaining price stability. It has assigned the core responsibility for supervising and regulating some aspects of the financial system to a separate federal agency, while also giving provincial governments authority over other parts of the financial system. The Canada's approach is the shared responsibility among the Department of Finance and other federal financial regulatory authorities, including the Bank of Canada, the Office of the Superintendent of Financial Institutions (OSFI) and the Canada Deposit Insurance Corporation (CDIC). Ultimately, it is the Minister of Finance who is responsible for the sound stewardship of the financial system. Canada’s shared system of financial regulation and supervision proved valuable during the recent global financial crisis.

In addition, within the federal government, the Financial Institutions Supervisory Committee (FISC) acts as the chief coordinating body that sets regulatory policy and supervises financial institutions. The Committee is comprised of the Department of Finance of the Ministry of Finance and four independent government agencies: the Office of the Superintendent of Financial Institutions (OSFI); the Bank of Canada (BOC); the Canada Deposit Insurance Corporation (CDIC); and the Financial Consumer Agency of Canada (FCAC) as shown in Table 1. These five semiofficial agencies report to the Minister of Finance, who is responsible to the Canadian Parliament.

Tab. 1: Main Domestic financial institution

Domestic institutions

Core Function

Office of the Superintendent of Financial Institutions (OSFI)

The prudential regulator of Canadian banks and other federally regulated financial institutions. Also responsible for implementing Basel Committee principles and guidance in Canada.

Responsible for the legislative framework governing banks and other federally regulated financial institutions in Canada.

Financial Institutions Supervisory Committee (FISC)

A committee of senior government representatives who meet regularly to share information and advise the federal government on financial system issues. FISC members are from OSFI (Chair), the Department of Finance, Bank of Canada, Canada Deposit Insurance Corporation (CDIC) and the Financial Consumer Agency of Canada (FCAC).

Canada Deposit Insurance Corporation (CDIC)

CDIC is a federal Crown corporation created by Parliament in 1967 to protect deposits made with member financial institutions in case of their failure. CDIC insures deposits of up to $100,000.

Source: Canadian Bankers Association

In particular, the FISC generally meets quarterly, but can meet more often if needed. In addition, FISC conducts a legally mandated five-year review of the National Bank Act to ensure that federal regulatory legislation is modernized periodically. Within FISC, the OSFI plays a key role in supervising Canada’s financial sector.

The OSFI supervises all domestic banks, branches of foreign banks operating in Canada, trust and loan companies, cooperative credit companies, life insurance companies, and property and casualty insurance companies. The OSFI has set limits on the ability of Canadian banks to leverage their capital and has set target capital ratios that are higher then the international standard. In broad terms, the OSFI is responsible for a number of activities including: assessing the financial conditions and operating performance of the institutions under its jurisdiction; reviewing information obtained from statutory filings, financial reporting, and management reporting requirements; conducting meetings with institutions; attending board meetings when necessary of institutions to discuss the results of supervisory reviews; providing composite risk ratings to institutions; advising institutions of any corrective measures that the institution will be requested to take; monitoring any corrective measures; and reporting to the Minister of Finance on an annual basis.

In addition, recently was concluded the agreement between the Ministers of Finance of British Columbia, Ontario and Canada to establish a cooperative capital markets regulatory system. The system will have a federal statute that will address criminal matters, systemic risks in capital markets and national data collection, while member provinces will adopt a uniform act which will cover all the areas that the existing provincial securities statutes address. As it is expected to reduce compliance costs and facilitate coordination across jurisdictions and regulatory authorities, as well as to enhance systemic risk monitoring and enforcement, especially if all provinces participated.

Banking System

During the recent crisis, Canadian banks had a stronger balance sheet position compared to european and U.S. banks. Despite the current issues of the world economy, no Canadian bank needed public capital injections and none used public guarantees. This higher level of capital and liquidity means that Canada is well positioned to meet the higher capital and liquidity standards adopted under the Basel III framework. The IMF points out that Canadian banks have been more resilient, because Canada has a strong financial regulatory and supervisory framework. The regulatory structure also discourages Canadian banks from taking excessive risks. Canada requires banks to hold capital at rates that are higher than those set in the Basel Accords.

Canada’s financial system is dominated by five large banking groups (Royal Bank of Canada, TD Canada Trust, Bank of Nova Scotia, Bank of Montreal, and Canadian Imperial Bank) that account for about 60% of the total assets of Canada’s financial sector. In comparison, foreign banks account for about 4% of Canada’s total assets in the financial sector. The low representation by foreign banks is attributed to the “widely-held” rule for large banks that limits the concentration of bank share ownership and, therefore, reduces the scope for mergers and for foreign entry through acquisitions or mergers. This lack of competition, combined with Canada’s financial legal framework, allows Canadian banks to concentrate more on their low-risk, profitable domestic retail banking activities (services provided to individuals including deposits, savings accounts, mortgages, credit cards, etc.). The authorities indicated that the expansion abroad could in principle help Canadian banks diversify risks, but also that they would need to monitor potential changes in banks’ risk appetite, including through on-site visits.

Canadian banks reported record profits in 2013, as greater income from fees and wealth management and costs compression have more than offset narrower interest rate margins from the slower growth in household loans. the central bank, however, does not hide her worries for the high level of indebtedness of Canadian households (mainly because of the real estate loans), value among the highest in the OECD countries.

Vulnerability and Potential Risks for Canada’s Financial System

The Canadian financial system remains robust (Canadian banks are well capitalized; financial markets continue to function well; and financial market infrastructures are supporting core activities, in line with international standards) but recently garnered attention because nonetheless, there are three potential key vulnerabilities:

1. Imbalances in the Canadian housing market. Imbalances in the housing sector continue to be demonstrated by elevated house prices, together with a buildup of supply in some segments of the housing market. House prices are still growing faster than disposable income as shown in Table 2.

Tab. 2: Imbalances in the Canadian Housing Market

1. 2. Elevated level of Canadian household indebtedness. The ratio of aggregate household debt to disposable income in Canada remains at a historically high level, as shown in Table 3.

Tab. 3_ Elevated level of Canadian household indebtedness

1. 3. Significant exposures to potential external shocks. Canada is an open economy, which means that its markets for goods, services and finance are globally integrated. While access to global markets provides important benefits to Canadian households, businesses and governments, cross-border linkages can also transmit external vulnerabilities and shocks to Canada.